Does Leaking an M&A Deal Pay?

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As recently as last February, the premature leak of a merger deal occurred. The Securities and Exchange Commission froze the Goldman Sachs account of a Swiss trader who allegedly bought a large number of Heinz call options the day before Berkshire Hathaway and 3G Capital agreed to buy Heinz.

But intentional or unintentional leaks involving global mergers and acquisitions have dropped in the past four years. They have fallen from a high of 11 percent of deals during 2008 to 2009, to 7 percent in the period 2010 to 2012, according to the M&A Research Centre at London’s Cass Business School.

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One reason, at least in the case of intentional leaks, is a subdued deal-making environment, says Cass. “The target is less likely to be able to stoke up a bidding war and will therefore focus on getting the initial deal done,” says a new report from Cass. But there is another: What was once a more common practice may now be judged as too risky.

A report of 4,000 transactions from 2004 to 2012 released Tuesday by the Cass Business School and data room company IntraLinks did find some evidence that M&A leaks can help a deal. (The study used heavy pre-announcement share trading as an indicator of a leaked transaction.)

In the past eight years, deals in which there was significant pre-announcement trading (SPAT) achieved higher bid premiums over the target’s undisturbed share price, according to the Cass study. From 2010 to 2012, targets in leaked transactions got a 53 percent bid premium on average, versus 30 percent for unleaked deals.

That may be because the initial bid sets a floor price and premium for the target, the Cass report says. In addition, when an initial bid is leaked prematurely the second bidder “gains valuable information and time.”

On the buyer side, it’s advantageous for an acquirer to leak a bid when it wants to derail a deal or speed it up, international investment bankers interviewed by Cass say. A leak is a way to extend a deal’s completion time, frustrating sellers and causing them to end negotiations to look for another buyer. The first bidder then may be able to walk away without paying a breakup fee.

Some M&A practitioners also think leaks from a buyer or seller can drive a deal forward by pressuring the other party. A leak from a seller can force a prospective buyer, for example, to formally declare its interest.

But the chorus of voices from M&A practitioners is clear – prematurely talking about a deal or letting information slip out is too risky. “We rarely see it nowadays, even among private companies,” says Howard E. Johnson, managing director of Veracap M&A International. Aside from potential severe legal ramifications, divulging a deal before a formal announcement comes at a high cost, says Johnson. “If [a company] is going to use that as a tactic they need to be very careful – they have to have a good story behind the leak because it may have unintended consequences.”

And it’s also a poor way to find another bidder, he points out. Any company that intentionally leaks news of a possible deal probably hasn’t shopped the deal well, he says. “If a [seller] is thinking about [leaking], why don’t they go directly to the parties they want to attract, as opposed to doing it in a way that they hope attracts some interest?” he says.

Unintentional leaks can be just as damaging. Experts say companies can mitigate the risk of them by drafting proper nondisclosure agreements and having strict policies and practices for document and data security.

But new avenues for unintentional disclosure keep popping up. What’s the latest twist? Blunders using social media. Potential buyers have been searching the LinkedIn profiles of employees of target firms without realizing the employees can see that a competitor has viewed their information. When this happens to more than a few employees at a target firm, rumors start to spread, says Johnson. If customers and employees get wind of a deal early, it puts not just the deal but the company at risk, says Johnson.

A challenge with any unintentional leak is that when other [bidders] come forward, it takes time and could mess up the process, Johnson says. “Any M&A process has to be carefully controlled to ensure the seller receives maximum value,” he says.

Finally, if a reputable investment bank is running the show, it typically won’t want to be associated with a leaky deal, says Johnson. “Most business owners are very concerned about confidentiality and so most investment banks would want to disassociate themselves from any leaks,” he says.

The premium that leaked M&A deals earned in the Cass analysis could be because leaked deals tend to be of high quality, the Cass report notes. “A target in high demand and likely to attract bids from a range of parties has more incentive to leak information than a low-quality target with limited takeover interest.”

And other ramifications of a deal leak throw cold water on the notion that it’s a good idea. Since 2008 deals that displayed lots of pre-announcement trading had no higher probability of attracting a second, higher bid than unleaked deals, Cass found. And since 2004, deals with significant pre-announcement trading activity have taken longer to complete – 124 days versus 116 days for those with no SPAT. And in the past two years deals displaying SPAT were completed 80 percent of the time, compared with 88 percent when no SPAT was found.

Laws against market manipulation and insider trading around M&A deals have diminished such activity in the United States. In cross-border deals, however, companies have to protect against and prepare for leaks. In North America, for example, about 7 percent of the deals showed significant pre-announcement trading from 2004 to 2012, but in the United Kingdom 19 percent of deals did.

The Cass report attributes the high number of incidences in the United Kingdom to a previous lack of regulatory enforcement and monitoring. Since 2007, however, the U.K.’s Financial Services Authority has spoken out about strategic M&A leaks and counseled senior management of companies that they must establish a culture that actively discourages leaks.

Two years ago, the U.K. Takeover Panel also introduced new requirements concerning the timeframe in which the names of bidders have to be disclosed. U.K. deals displaying pre-announcement trading have thus dropped to 13 percent of deals.

The analysis by the M&A Research Centre at London’s Cass Business School and Intralinks looked at more than 4,000 global transactions between January 1, 2004, and October 16, 2012. A Cass spokesman says the average deal value was $1.9 billion, and the sample set was created so that the minimum equity value for the target was $100 million. This was done to exclude small-company targets with illiquid stock.